MOODY'S CONFIRMS RATINGS OF SONAT (SR. UNSEC. Baa1), SOUTHERN NATURAL GAS (SR. UNSEC. A3), SOUTHERN ENERGY (IRB A3)
New York, 10-02-95 -- Moody's Investors Service confirmed the long-term debt ratings of Sonat Inc. at Baa1, of Southern Natural Gas Company at A3, and of Southern Energy at A3, and changed the outlook on the ratings from positive to stable. The rating action is based on Moody's expectation that significant debt reduction at Sonat Exploration through recently announced asset sales will not be sufficient to offset the volatility of exploration and production (E&P) earnings and cash flow. The ratings also reflect management's strategy to continue to grow the E&P segment through reserve acquisitions and the considerable level of debt at Citrus Corp., a 50% owned unconsolidated subsidiary. The rating action ends a review that began on June 21, 1995.
Ratings confirmed are Sonat's senior unsecured notes at Baa1 and shelf registration for senior unsecured debt at (P)Baa1, Southern Natural Gas Co.'s senior unsecured notes at A3 and shelf registration for senior unsecured debt at (P)A3, and Southern Energy's industrial revenue bonds at A3. The rating agency also confirmed Sonat's Prime-2 rating for commercial paper.
Sonat Exploration's earnings and cash flow are vulnerable to swings in natural gas prices since 80% of the company's production is natural gas. With only limited hedges in place, earnings performance is likely to remain weak until gas prices improve. Despite the anticipated debt reduction from asset sales, Sonat Exploration's estimated 1995 debt leverage (including allocated parent company debt) will remain relatively high for a pure E&P company. Although Sonat Exploration's expansion strategy entails acquiring and developing proven reserves without assuming exploration risk, its finding and development costs are not much lower than those of its peers. In addition, the company has a relatively short average reserve life of approximately seven years.
Sonat's debt is used primarily to fund the activities of Sonat Exploration. Due to the volatility of E&P earnings and cash flow, Southern Natural Gas could be called upon to pay substantial dividends to its parent. Southern Natural is likely to continue to generate strong earnings and cash flow based on its attractive location and the high probability of a favorable settlement of its current rate case. However, competition is likely to increase, and over 40% of Southern Natural's firm transportation agreements have maturities of only three years.
Sonat holds a 50% interest in Citrus Corp., a holding company that owns 100% of Florida Gas Transmission (FGT), a major interstate pipeline serving the Florida market. FGT has assumed a considerable amount of debt over the past few years to fund a large system expansion. Since Citrus and FGT represent a significant share of Sonat's total investments, Moody's includes a portion of their non-recourse debt in Sonat's total debt, which materially increases Sonat's leverage.
Headquartered in Birmingham, Alabama, Sonat Inc. is an integrated oil and natural gas company engaged in exploration and production of oil and natural gas and in natural gas transmission and marketing. Southern Natural Gas Company is a major interstate pipeline serving the Southeast. Southern Energy Company, a wholly owned subsidiary of Southern Natural Gas, owns a liquified natural gas facility near Savannah, Georgia.
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